The end of the cheap Chinese commodity era

Li & Fung, a Hong Kong-based consumer goods sourcing and logistics company, warned that “a new era of price increases for procurement” has arrived, and that manufacturing companies have passed the cost of the rising raw materials and Chinese labor to customers.

The supply chain company announced on Thursday that profit in 2010 rose by 27% to 4.28 billion Hong Kong dollars (US$550 million). Li & Fung supplies companies such as Walmart and Gap in the United States, and Debenhams in the United Kingdom.

Bruce Rockowitz, president of Li & Fung's trading company, said: "In this industry, the biggest topic in everyone's mind is: The price increase is indeed a foregone conclusion. At the moment, retailers are not sure what can be passed on to consumers. And which can't be."

William Fung, managing director of Li & Fung Group, said that the intensification of labor competition in China has led to a salary increase of about 20% this year. For the world economy, this indicates the end of China-led deflation.

The company stated that, traditionally, the price increase has benefited its trading business. "Over the past 20 years, we have had to increase our shipments (in order to maintain our revenue growth) as prices continue to drop," said Yue Yumin. The company's core operating margin rose from 3.82% in 2009 to 4.56% in 2010.

The rise in labor costs in China has prompted Li & Fung to relocate the production of labor-intensive goods such as clothing to countries with lower wages, such as Bangladesh, Vietnam and Indonesia.

Li & Fung said that currently Li & Fung's clothing procurement business, China's share of only 25%. Le Yumin said that the proportion of Bangladesh and Vietnam in their apparel business is rapidly increasing.

Despite this, due to a series of acquisition transactions last year, China's share of Li & Fung's total purchases increased from 54% in 2009 to 57% in 2010.